Individuals can deduct only a limited amount of state and local tax on their federal return. Business entities have no such cap. A pass-through entity (PTE) tax election lets an S corporation or partnership pay the owners' state income tax at the entity level, where it is fully deductible, while the owners receive a credit on their state returns.
Why it still matters after the SALT changes
The 2025 tax law raised the SALT deduction cap to $40,000, $40,400 in 2026, but the increase phases down for modified AGI above roughly $500,000 and returns to $10,000 for the highest earners. Many practice owners and fund professionals are well above that range. For them, a PTE election remains one of the most valuable state tax strategies available, and the 2025 law left it in place.
How it works in our states
- Oregon. Oregon has offered an elective pass-through entity tax for several years, with the election made annually on the entity's return. The program has been extended more than once, so we confirm its status for each tax year before relying on it.
- California. California's elective tax has been extended through 2030. To elect for a year, the entity generally must make a prepayment by June 15 of that year. Missing it can forfeit the election.
- Idaho. Idaho allows qualifying entities to elect to pay tax at the entity level, with owners receiving a credit.
- Washington. Washington has no personal income tax on business income, so there's no PTE election to make. Washington-based owners of entities with Oregon or California income may still benefit in those states.
Who benefits most
- Owners of S corporations and partnerships with substantial state-taxable income.
- Owners whose personal SALT deduction is already capped or phased down.
- Professional practices, investment management firms and real estate partnerships with high-earning partners.
Trade-offs to check
- Cash flow. The entity, not the owners, makes the payments, so distributions and estimated payments have to be coordinated.
- All owners are affected. In some states, the election covers all owners or requires their consent. Partners in different situations may benefit differently.
- QBI deduction. The state tax paid by the entity reduces business income, which can slightly reduce the 20% QBI deduction.
- Credit limits. State credits may not be fully usable in some cases, such as when an owner has losses or lives in another state.
- Sole proprietors and single-member LLCs taxed as disregarded entities generally can't elect.
Deadlines and timing
For the federal deduction, the state tax generally needs to be paid by the entity during the tax year. Combined with California's June prepayment rule and each state's election deadlines, the PTE election is a decision to make early in the year, not at filing time.
The bottom line
For high-earning owners in Oregon and California, a PTE election can be worth tens of thousands of dollars a year. We model it each year alongside salary, distributions and estimated payments so the savings are real and the deadlines aren't missed.
This article is general information, not tax, legal or investment advice for your situation. Rules and thresholds change, so please talk with a qualified advisor before acting.
